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What Does Your ETF Own?

March 2010

Picking Stocks

Exchange Traded Funds, or ETFs, are the newest flavor of mutual fund. ETFs can be a useful and low-cost investment choice, or they can be a high-cost, high-risk disaster-in-the-making. With over 1,000 ETFs, many less than two years old, it’s getting downright dangerous out there for the uninformed investor.

As with any mutual fund the most important question you should ask before you buy should be, “What is this thing, really?”

What does the fund actually own? Does it hold stocks or bonds? Does it hold something other than stocks or bonds, such as futures contracts or gold bricks? And how will adding those particular assets affect your investment portfolio?

You can’t just go by the name: a gold ETF might own stock in gold mining companies, or gold bricks or derivatives, such as futures contracts. The ETF will behave very differently depending on which type of asset it owns, and your gains and income may be taxed very differently depending on what the ETF actually owns and how it works. Some of the newest ETFs, such as the debt-laden (a.k.a. highly leveraged) Ultra Funds are so dangerous that they should be illegal. If you don’t do your homework before you buy an ETF you could be in for some nasty surprises in the next big market move or when your tax bill comes due.

Here’s How to Find Out What Your ETF Owns

There are three key sources of information that you can use: the fund prospectus, the most recent annual or semi-annual report and information provided by the index creator rather than the fund manager.

Fund Prospectus. First stop is the fund prospectus and the web site provided by the ETF manager. These will generally tell you what index the fund is designed to track and something about the broad investments goals for the fund and the fund holdings. You can easily find the prospectus by Googling the full name of the fund followed by the word “prospectus”; one of the top listed links will generally be a downloadable PDF for the fund’s prospectus. If you don’t know the full name of the fund, try Googling the ticker symbol followed by the word “quote.” This same search will also generally pull up a link to a fact page provided by the fund manager, which is another useful source of information.

Annual and Semi-Annual Reports. ETFs are also required by the SEC to file annual and semi-annual reports. These, like the fund prospectus, are easy to find and download on the ETF manager’s site. The annual and semi-annual reports will generally provide summary data on the investments in an introductory section. In addition, it is very enlightening to scan the list of fund investments. Are the holdings individual stocks or bonds—or does the fund hold derivatives or carry debt that might add to your risk? What are the fund’s top 10 holdings? What percentage of the assets is invested in those top ten holdings? What are the top industries represented? One student in my index fund seminar was shocked to find that a preferred stock index ETF (iShares Preferred Stock, ticker symbol, PFF) that she bought thinking it was a conservative investment has 88 percent of its assets invested in financial services companies. This level of concentration in a single industry creates significant risk.

Index Construction. It can also pay to check out information from the index creator on how the index is constructed and managed. Remember that an index and an index fund are two different things. The index is a purely a mathmatical formula that attempts to track changes in the prices of a group of assets. In contrast, an index fund actually makes investments in the assets that are included in the index. In the world of ETFs, indexes (the mathematical contructs) are often created by one company and then licensed to another company (usually a money management firm). A trip to the web site of the firm that creates the index can provide important information, for example, explaining how a company’s stock is chosen for inclusion in the index and why a company might be dropped from the index. This can be an especially important step if you are considering an investment in one of the many new and off-the-beaten-track ETFs launched in the last couple of years.

Useful Web Sites

The three major managers of exchange traded funds are: iShares, owned by BlackRock Capital; SPDRs (pronounced “spiders”), owned by State Street Global Advisors; and Vanguard. All three money managers provide great information that will help you research and compare ETFs.

To learn more about how the underlying indexes are created and managed visit: McGraw-Hill’s Standard and Poors, creator of the S&P indexes; MSCI-Barra, the new owner of the Morgan Stanley Capital Indexes; and Dow Jones, which creates the Dow Indexes.


Responsible Investing provides one-on-one and group coaching and education to help you understand your investments and make better financial decisions. To learn more schedule a free introductory meeting.


The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Past results are not indicative of future performance. Outside sources used in this article are believed but not guaranteed to be accurate. Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve.